藝康 (ECL) 2009 Q2 法說會逐字稿

Welcome on today's Ecolab second quarter 2009 earnings conference release call. At this time, all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. (Operator Instructions). This call is being recorded. If you have any objections, you may disconnect at this time.

Now I would like to turn the call over to Mr. Michael Monahan, Vice President External Relations. Sir, you may begin.

Thank you. Hello, everyone, and welcome to Ecolab's second quarter conference call. With me today is Doug Baker, Ecolab's Chairman, President, and CEO, who will join us for the Q&A session following our review of the quarter's results.

A copy of our earnings release and the slides referenced in this teleconference are able on Ecolab's website at Ecolab.com/Investor. Please take a moment to read the cautionary statement on slide 2 stating this teleconference and the slides include estimates of future performance. These are forward-looking statements and actual results could differ materially from those projected. Factors that could cause actual results to differ are described in the section of our most recent form 10-K under item 1A Risk Factors in our second quarter earnings release and in slide 2. We also refer you to our earnings release, which include supplemental diluted earnings per share information.

Starting with slide 3, in the second quarter, we delivered results at the top end of our forecast range despite very challenging market conditions, unfavorable currency trends, and substantially higher year-over-year delivered product costs, as we aggressively drove new account gains, new product sales, pricing, and cost reductions. Looking ahead, we expect to continue to outperform our markets and deliver superior growth once again in 2009.

Starting with some highlights from the quarter, as we move on to slide 4, reported second quarter 2009 EPS were $0.41. On a pro forma basis, excluding special gains and charges and discrete tax items from both years, second quarter 2009 earnings per share were $0.50 compared with $0.47 last year, an increase of 6%. Pro forma earnings per share were driven by strong new account gains, pricing, and cost savings, including about $0.04 from our restructuring and the impact of new products which more than offset about $0.05 from our higher delivered product cost and $0.05 of unfavorable foreign exchange impact.

We also continued to make key investments in R&D, systems and people that are important to sustain long-term success in our strategic growth areas. In the US we achieved double-digit sales grow in our Kay and health care businesses and solid growth from our core food and beverage business. International showed strong sales gains in Canada and Latin America, while Asia-Pacific reported modest growth and Europe/Middle East/Africa declined. To drive results in this challenging environment, we have continued to be aggressive in developing top line growth as we emphasize our innovative products that provide customers with labor, energy, and water savings. We are using these products to help deliver new account acquisition among our national, regional, and independent prospects. We have also focused on cost savings, emphasizing productivity inefficiency improvements and increased pricing to recover higher raw material costs.

Looking ahead, while it appears the economy may have stabilized, we have not seen enough turn in our major markets and are not counting on a recovery this year. We expect we will need to continue to work hard to drive sales and will closely manage our costs to deliver EPS growth this year. And if the markets do pick up, we will clearly benefit from our extra efforts. We expect pro forma EPS for the third quarter to be in the $0.58 to $0.61 range compared with pro forma EPS of $0.55 in the third quarter of 2008. We tightened our top and bottom ends of our forecast EPS range to $1.96 to $2.02. We continue to expect modest fixed currency sales growth in the second half of 2009. However, favorable delivered product costs and the impact of cost savings should provide significant benefit to operating margins.

In summary, we expect another strong performance for Ecolab in the very challenging 2009 environment, and strong sales efforts enable us to gain new accounts and better sales penetration. We will also continue to implement appropriate pricing and cost reductions to deliver steady growth and shareholder returns while continuing to invest for future growth.

Turning to the details as shown in slide 5, Ecolab's reported consolidated sales for the second quarter declined 8%. However, sales were flat at fixed currency rates. Looking at the components, volume and mix declined 4%, pricing was up 4%, and currency reduced sales by 8%.

Slide 6 includes sales growth by segment and division. Sales for the US cleaning and sanitizing operations increased 1%. Institutional sales were off 3% as new account gains, new products and pricing enable us to outperform lower demand from lodging and food service customers. We have not seen improvement in institutional's major end markets and do not expect a pickup this year.

We remain focused on driving sales gains in 2009 using innovative products like our Apex Warewashing program and Wash n' Walk that provides superior performance while delivering demonstrable water, energy, and labor savings as customers are looking for cost savings and efficiency in this tight economy. Our Apex Warewashing system, which enables us to help customers reduce total dish room costs and lower their environmental impact, continued to show strong growth and help lead sales for new accounts. Furthermore, Ecolab's customer support plan for H1N1 swine flu has resulted in additional sales of infection prevention products such as disinfectants and personal hygiene hand care products. We are also targeting independent accounts and regional chains with additional and redeployed salespeople in programs. This includes additional salespeople in corporate accounts, distributor sales, regional sales, and specialization of salespeople in the field.

In addition, we are utilizing improved prospecting tools and software. These actions have resulted in good new account activity and we are continuing our efforts to drive more gains in the second half. We expect these aggressive sales efforts and new account gains to help us continue to outperform our markets in the second half.

Kay's second quarter sales grew 13%, primarily reflecting new account gains and new product sales. Business trends remain strong in quick service restaurants with continued good ongoing demand from major existing and new fast food chain accounts. The food retail business continued to show strong growth with a double-digit gain. New products and programs like solids for QSR along with customer wins continued to bolster Kay's results. We expect these initiatives, along with continued good end market trends, to help drive strong gains in Kay's third quarter of 2009.

Textile care sales increased 1%. Good new account sales along with pricing offset depressed industry conditions. Customers have shown increased interest in the total cost operational savings textile cares products and services can deliver in this tough economy. We look for continued modest growth in the third quarter as business gains and new markets continue to offset lower industry volumes.

Health care sales rose 13%. Acquisitions accounted for 2% of that growth. Continued solid growth in our surgical drape business from patient warming systems and flu-related hand sanitizer sales led the results. The new nonaerosol foaming sanitizer for skincare as well as Asepti-Wraps for surgical instruments also continue to generate good customer interest. Looking ahead, third quarter sales should show continued good growth led by the surgical business.

Food and beverage reported sales rose 3%. Our core food and beverage business enjoyed good gains in the dairy, beverage, agri, and food markets as better pricing, corporate account wins, and new products drove a 6% sales increase. Water care sales were off slightly as shortfalls in the commercial market were mostly offset by the focus on our corporate account opportunities, particularly in food and beverage. As expected, Ecovation sales were down from last year on a comparable basis, reflecting the weak economy and tight capital markets. Customer interest remains good as the need for Ecovation's effluent management and energy systems remain strong. The sales of the smaller solid separation treatment units are good, but customers are reluctant to commit to the larger planned treatment projects or make major capital commitments in the current uncertain economy. We expect good sales trends once again in the third quarter for the food and beverage business as we continue to focus on new account acquisition, new product sales, and expansion of our water management platforms.

Vehicle care sales decreased 9%. Weak demand due to the recession more than offset better pricing and new, more sustainable products and programs. Vehicle care is focused on new programs and new market opportunities to drive sales. The division continues the roll-out of a recently introduced operational cost management program to help car wash operators critically analyze their operations and achieve cost savings through energy and water conservation. This should help food's future sales. We expect the third quarter will continue to be a challenging environment.

Sales for US other services decreased 5% in the second quarter. Pest elimination sales were flat in the quarter as gains in the fast food and food and beverage plant markets continued to offset weak conditions in restaurants and lodging. We continue to be focused on selling basic programs to new accounts as well as regional and local chain accounts. We are also targeting growth markets like QSR and food and beverage processing. These seem to be having a positive impact, with customers starting to show interest in new contracts and in seller reservices. These will take time to work through the sales, but it appears some stabilization is beginning to show. We expect pest elimination to show flattish trends in the second half.

GCS sales decreased 15% in the quarter. However, profitability once again substantially improved over a year ago and the prior quarter. Service and part sales were weak. The sales pipeline and chain customer interest remain good, and we were able to demonstrate the value of our service programs which reduce customer downtime and emergency repairs. New account wins were more than offset by current uncertain economy which has resulted in reduced spending as customers delay repairs and in longer decision timelines for new sales. Despite the lower sales volume, GCS profitability was substantially better as gross margins and SG&A ratios improved, dramatically shrinking the operating loss over last year as we continue to see productivity and efficiency improvements from the new systems. The new ERP system is providing the operating information that has led to improved customer and market segment profitability, dispatching improvements, better tech utilization, supply chain improvements, and improved working capital management. All of these have helped our operating efficiency and improved overall division profitability. Looking to the third quarter, we expect sales to be off due to the weak economy and decreased customer repair activity, but we expect GCS will again report significantly improved profitability over the prior year period.

Measured in six currencies, international sales decreased 1%. Europe, Middle East, and Africa sales declined 4% in the second quarter at fixed currency rates. Europe's institutional sales declined as food service and lodging trends were weak. In response, we have dedicated sales resources targeting new business and emphasize new products and the cost savings we offer customers to drive market share. Food and beverage sales declined, reflecting lower consumption, reduced plant utilization, and capacity as well as reduced equipment installations. F&B is focused on winning new customers by emphasizing the cost savings benefits of our leading products like DryExx and Accelerate as well as implementing appropriate pricing. Textile care sales declined, reflecting reduced tourism and uniform volumes. Europe's health care sales reported solid growth. Increased sales of hand disinfection products, helped by H1N1 concerns, along with customer gains in the pharmaceutical sector for our hard surface disinfection products, led results. New product launches in the second half should enable continued growth.

[West] Europe showed better core contract sales. However, these were offset by soft ancillary program revenues. Europe's business information systems platform work continues to move forward. We have successfully implemented the system in four countries, including our largest country, Germany, and the country with our largest plant, which is Belgium. We will continue to roll out to the remaining system locations over the next 18 months. With continued weak markets, we look for Europe's third quarter fixed currency sales to be off from last year's levels.

Asia-Pacific sales grew 4% in fixed currencies. Institutional's modest sales gains were driven by account wins in catering, mid scale hotels, and restaurants as well as food retail markets. They continue to offset weak occupancy and lower overall catering in the high end hotels. Food and beverage sales reported solid growth. Both the beverage and [brewing] sectors continue to show solid growth due to increased product penetration and account gains. Looking ahead, Asia-Pacific expects continued sales growth for the third quarter and the remainder of 2009.

Second quarter sales for Ecolab's Canadian operations were up 10% over last year at fixed exchange range. Food and beverage and institutional sales were strong, driven by new account gains, product price increases and institutional's increased focus on distributor partnerships. Pest elimination, vehicle care, and health care sales were also strong, driven by new account gains.

Latin America reported a solid sales gain, rising 8% at fixed exchange rates as all divisions increased. Institutional growth was driven by new account gains and increased product penetration as well as continued success with a global and regional accounts. Food and beverage sales reflected strong demand in the beverage and brewing markets as well as the benefits of new accounts. Pest elimination continued its outstanding performance throughout Latin America. Overall, we expect healthy growth trends to continue in Latin America with another solid gain in the third quarter.

Turning to margins on the income statement and slide 7 of our presentation, second quarter gross margins increased 60 basis points and were 49.7% compared with 49.1% last year. Pricing more than offset higher delivered product costs. SG&A expenses were 36.5% of sales, 40 basis points below last year. The lower SG&A ratio reflected savings from our recent restructuring, price leverage and closely managed spending, which more than offset higher costs and continued investments in our business.

Operating income for Ecolab's US cleaning and sanitizing segment increased 18%. Margins expanded by 260 basis points over last year. The increase was driven by pricing gains and cost savings, which more than offset slowing delivered product cost increases. Operating income for US other services grew 40%. Growth was driven by pricing, productivity, and efficiency gains and cost reductions. International fixed currency operating income decreased 17%. The lag of higher delivered product cost increases internationally, primarily in Europe, impacted second quarter international operating income. Pricing gains and cost savings efforts were unable to offset lower sales volume, delivered product, and other cost increases, and continued investment in the business. The impact of delivered product cost increases are expected to moderate in the third quarter and the balance of 2009.

The corporate segment includes special gains and charges which are reported as a separate line item on the income statement. Special gains and charges which are not included in pro forma results include a restructuring charge of $24 million for actions primarily taken to optimize our workforce as well as other nonrecurring costs to optimize our business structure. Second quarter 2008 special gains and charges included a $24 million gain on the sale of the plant. The corporate segment also includes $7 million of investments in the development of business systems and other corporate investments we are making as part of our ongoing efforts to improve our efficiency and returns in Europe. These investments are included in pro forma results.

Ecolab's reported second quarter consolidated tax rate was 33.6% compared with last year's reported 28.8%. Excluding discrete tax items and the tax impact of special gains and charges, the adjusted effective income tax rate for the second quarter 2009 was 31.3% and compared with 32.8% in the second quarter 2008. The decrease in the adjusted tax rate was primarily due to tax planning efforts involving optimization of our international tax structure and global rate reductions. The net of this performance is that Ecolab's reported second quarter diluted net income per share was $0.41 compared with $0.55 reported a year ago. When adjusted for a special gains and charges and discrete tax items, pro forma earnings increased 6% to $0.50 when compared with $0.47 reported a year ago. As mentioned in our opening comments, pro forma earnings per share were driven by new accounts, pricing, and cost savings, and the impact of new products which more than offset higher delivered product costs, unfavorable foreign exchange impact, and key investments in our business.

Turning to slide 8, Ecolab's balance sheet and cash flow remain strong. Total debt to capital is 37% at June 30 compared with 36% reported a year ago and 42% at year-end 2008. Our net debt at June 30 was 35%.

Slide 9 shows our forecast for the third quarter and full-year 2009. The press release includes line item forecasts of our third quarter P&L. As previously discussed, we look for continued slow market conditions through the balance of 2009 and are taking appropriate actions to drive both the top and bottom lines in these markets. We have been successful in using our new products that help customers reduce their costs and improve their efficiency along with our service strengths to capture market share and drive growth. Further, as raw material cost comparisons ease in the second half from the extremely high levels of a year ago, we look to recover margins and continued investments in key areas like corporate account sales, R&D, health care, water and energy, and global pest elimination to drive future growth.

The third quarter we look for our US operations to show sales similar to last year in the face of continued challenging conditions. We will continue to emphasize products that provide unparalleled performance and energy and cost savings for our customers. We expect them to provide further differentiation and opportunity and help drive results. We look for international sales to also be similar to last year at fixed exchange rates as good growth from Canada, Latin America, and Asia-Pacific are offset by Europe. Net including the estimated $0.03 impact from unfavorable foreign exchange, we expect pro forma diluted earnings per share for the third quarter, excluding special gains and charges and discrete tax items, to be in the $0.58 to $0.61 range compared with a pro forma earnings per share of $0.55 earned a year ago.

In summary, as noted on slide 10, we have performed effectively in the second quarter against very tough conditions and delivered on our forecast as we also invested in our future. And despite the expected challenges from the weak markets and unfavorable foreign currency exchange, we continue to look for an attractive performance once again in 2009 and use the strength and momentum to set up 2010 and beyond.

As a final note, we are planning to hold our biannual investor meeting on September 10. A limited number of seats remain available. Please let us now before August 21 if you plan to attend or if you have any questions by contacting me or Nicole Grochow in my office.

That concludes our remarks. This conference call and the associated slides will be available for replay on our website. Operator, please begin the question and answer period.

(Operator Instructions). And our first question is from Andrea Wirth from Robert Baird. Your line is open.

Hi Doug and Mike.

Hi, Andrea.

Wondering if you guys could just first talk a little bit about raw material costs in the quarter. I guess, one, how were they versus your expectations? And I guess, two, have we now reached the high point in costs and have they now come down sequentially? Just trying to get a sense of where we are at there.

Andrea, Doug. They did come down from Q1 as we anticipated. I would say they came down in line with what we forecasted. Obviously less than we hoped, because we'd like them to flop. But I guess our view that we shared in the first quarter that they would continue to fall sequentially is still our view. And so they were down in the second quarter. We believe they will be down again in the third quarter versus Q2 and they will float to favorable if you will in the second half here --

I'm sorry. What was that? They would be favorable overall for the second half?

For the second half they will be favorable versus second half of 2008.

3Q, you still expect them to be a headwind, right?

No, a help in Q3.

A help in Q3. Okay. And how should we think about pricing going forward and you saw 4% again this quarter? Should we assume that that pricing probably moderates a little bit or how should we think about that going forward just given the raw material costs are subsiding a bit?

I think what we have discussed on pricing is we do not -- we believe we will successfully hold the pricing that we have achieved, but we do not believe we will be gaining new pricing agreements at the same rate we were last year. Therefore, I think you'll see a slow moderation year on year as you go through the year.

Thank you. The next question is from Laurence Alexander from Jefferies. Your line is open.

Hi. This is Amanda [Seguin] on for Laurence. First of all, in the quarter you came in at the top end at your range for Q2, but you're narrowing the top end of the range for the full year. Just wondering if you can walk us through what your thinking is there.

The range, $1.95 to $2.05, which was our prior range for the year, is a much wider range than we normally have. If you recall, it's a range that we established first early November when we were out in the secondary moving the Henkel shares. And I think our feeling was as we move through here, that we wanted to give a better idea of how the year was developing. And so narrowing it seemed like the wise course of action.

Here's what I would say. We see our business improving, we are not counting on any material improvement from the economy. We hope we are wrong. We haven't been so far. We also believe that we are going to continue to use the second half to invest in our business to ensure that we have a very successful 2010 and beyond. We like the position that we have put ourselves in and we want to continue to make sure that we optimize and take advantage of the market conditions that we are seeing -- which means competitors are stressed, we have a number of important investments we want to make that are going to get us both share and leverage and we want to make sure we make them in the second half as well.

And the thing I would add is that we are looking at pretty strong earnings growth in the second half. I think as you look at the range, it's 13% to 19% EPS growth. So clearly we are going to enjoy a period of some very good earnings in the second half of the year.

Okay. And just to follow up. As far as M&A opportunities, what's the landscape looking like in Asia and Latin in America in particular?

Well, I guess my feeling on M&A is we have got what I consider a robust pipeline, but until they are done, you can't count them because they move in funny ways. I would say our emphasis is in probably areas versus regions, areas like health care, expanding pests globally, water and energy, technology that makes sense for institutional and F&B markets. So I mean, we have people -- we have got properties on the list in both Asia and Latin America, but they are probably proportionate to market.

Okay. Thank you.

Thank you. The next question is from Mike Harrison, First Analysis.

Good afternoon. It's Steve Schwartz sitting in for Mike today. Just two questions. I guess in international, your operating margins were down and you had mentioned it was operating cost increases. I'm wondering if that's just the employment market frictions and so forth that are in Europe that are holding back your restructuring, or what's behind that?

The -- I mean the major reason is Europe saw raw material increases really flow through a quarter later and then the balance of the world, and it had a material impact on Europe's earnings in the first quarter. The raw material costs are subsiding in Europe, but they are doing at it a quarter behind everywhere else. And so they were much lower in the second quarter than in the first. We know they will be much lower in the third than the second. So really it's raw material, it's the bubble moving through at a slower pace or a delayed pace in Europe. I would expect to be, as I said in the last call, we still expect Europe margins to be back in the normal, call it 8% ish range by the end of the year.

Okay. And then that FIFO effect, is that included in the commentary in your press release about operating cost increases, then?

I'm not sure what you meant by that question, Steve. Could you repeat it?

Oh. Well, it sounds like, Doug, you were talking about the FIFO effect in Europe and raw material costs, but in the release you talk about operating cost increases outpacing pricing, particularly in Europe. I wondered if there was something other than the FIFO effect.

I mean, it's not really FIFO per se. It's just simply knowing how much inventory. It's really the timing of the raw material price increases and how the high priced raws are flowing through our P&L, right, and they probably hit peak pricing for the company at the very January 1st, but they were delayed a quarter, if you will, in Europe and it's just a flowthrough impact. But they are coming down. We are buying raws at much lower prices and we know it will possibly impact the P&L as we move throughout the year.

Okay. And then just quickly for my follow-up, your guidance for the third quarter is 50% to 51% gross margin. You had nice gross margin in the second quarter. It sounds like you're going to continue to have the raw materials tailwind in the second half, so would you expect that your gross margin stays north of 50% beyond the next quarter or two?

Yes, I think historically we have been north of 50%. We go through periods where we have got whatever very difficult raw material markets where it can knock us down. We tend to price over a period of time, not try to recoup in any one-year. Our plan to be to build and sustain it there.

All right. Thanks, guys.

The next question is from Bob Koort, Goldman Sachs.

Thank you. Good morning -- or good afternoon.

Hello, Bob.

Hello, Bob.

Mike, I'm wondering if you guys have given any consideration or thought to what your incremental margin in the recovery might look like if any differently than say the early 1990s, early part of this decade? Is there a reason to expect your structural cost work is going to give you a little more juice when things recover or do you think you would just increase your expense load as things get better as well?

This is Doug. I would expect that the work that we have undertaken and we have tried to leverage this period to get was leverage that was sustainable. So we would expect that we will have a more -- a better business and a better aligned margin post this period than we did pre this period.

All right. Thank you.

And the next question is from Ed Yang from Oppenheimer. Your line is open.

Thank you. Regarding your market share gains, are there any specific accounts that are note worthy or you'd like to share? And are these new account gains -- are they more new accounts to Ecolab or are they part of the circle to customer and cross selling opportunities?

Ed, most of our emphasis right now has been on what I'll call new accounts to Ecolab, and we have been working hard to increase the number of accounts that we serve in our markets. This is typically -- we find the recessionary periods are the best time to go increase share of units, and that's what our emphasis is. We typically don't share account gains and losses by name, so I will stick to that policy. Occasionally people start figuring out who they are if they are large and meaningful, and there have been several significant wins around the globe and we anticipate more.

Doug, isn't it an easier share take if you already have the existing relationship with the customer, though? So, I mean, would it be picking, I guess, low hanging fruit if you go after accounts where you already have the relationship?

Ed, we -- circle the customer is what we call it, or cross selling is a more used term in other industries. What we have found over time is typically when people get in these recessionary periods, they start pushing hard on internal spending and they start going through. So certainly we continue to go push and try to go build our services, but what we have found is leveraging anchor technologies and seeking out new customers is probably even a better path in these periods. That's what our experience was in the early 1990s and the early 2000s. It's what our experience is today. We will aggressively start adding on circle the customer opportunities as the recovery unfolds.

Okay. And regarding raw materials, you're very diversified with your raw materials basket. But I do notice on a spot basis there's been a tremendous amount of price volatility, for example with chlorine, which has gone up a lot recently, and caustic, which has declined. Could you remind us what are some of your key raw materials?

I think the raw materials that have probably most influenced the delta in the past are going to be caustic, phosphates broadly, plastics, if you want to get down, and surfactants. And plastics and surfactants are going to be more related to oil than the other two, but not directly.

Okay. Thank you very much.

The next question is from Mark Gulley of Soleil Securities.

Good afternoon, guys. A couple of questions if I can. One, Doug, can you update us a little bit on what seems to be the state of play with respect to the large competitor based in Wisconsin?

I guess what we have seen out of that competitor is, I guess, more of the same, which is part of why they have got some of the same market pressures we have in terms of raw materials and induced market declines. They continue to do the stuff. They are reducing headcounts. They continue to play in the market as they have in the past. So I wouldn't say that we have seen material change out of them but what they have been -- they have been under pressure for a while and they continue to play like they are under pressure.

Okay. Switching to vehicle care, if I can. I would think that maybe now might be a good time to try to talk to your national chains about adopting that program because things are slow and if there's any -- if it's going to be any disruption, the risk of that disruption being a problem to the customer would be less. Is that a reasonable sales proposition to the customer or is that just a little bit too cute?

Mark, are you talking about vehicle care?

I meant -- no. I really meant GCS. I'm sorry.

Okay. I was going to say, how do you play vehicle care? I think look, we have been -- we are continuing to pursue new business in GCS actively. GCS has been under a pretty significant pressure. From what we know of other people in this industry, we are outperforming on the top line as bad as it is versus what others are going through. But we also expect the top line not to heal itself in the second half but to show improvement, i.e. the rate of decline for sure will fall as we go through this because we have had some recent new business success. And so I agree with your thesis and I may have you talk to our sales force with GCS directly.

I doubt that I could be very helpful at all. Hey, the analyst day is in about six weeks. Can you give us any sneak preview as to some of the themes you'll be talking about then?

Hey, look, our themes are fairly consistent. I guess what we want to do is try to help dimensionalize the continued upside in terms of sales in share and I think we have got a very rich target [with] how we are looking at going after it. I think during that day we can give you more specifics about what we plan to do. We have got a very robust R&D portfolio, which we are excited about that we will also -- parts that we can share, we will share. And then finally, luckily, the company we still feel has a lot of leverage in front of us and we plan to build a very strong sustainable earnings machine, and there's a lot of work to be done. But there's still a lot of leverage to be harvested.

Thanks, Doug.

And the next question is from Nate Brochmann, William Blair and Company, your line is open.

Good afternoon, gentlemen. Nice quarter.

Thanks, Nate.

I wanted to talk a little bit about the top line in Europe. While down, it looks a little bit better than it might have been maybe over the last couple of years, and just wanted to see if you could talk a little bit about some of the incremental sales efforts there in terms of stemming the tide a little bit.

Nate, we have invested in Europe and increased resources at our corporate account teams specifically and (inaudible) and then F&B, which are the two big businesses there. And it's had an impact. I would say we watch very closely net gains to net losses, things that we absolutely control. We can't control how many units close and we can't necessarily always control consumption within a restaurant or in another facility. But those we can control and we have been successful outpacing losses with net gains for quite a while.

We are also getting on pricing and Europe is going to have a much better pricing year. They are delayed a year. We wish it was earlier, but they are getting it, which is important given the raw material runup they have had. So I think those are the big impacts.

Great. Thanks. And then also just a more simple question -- was wondering if you could talk a little bit about what the benefit was for increased product sales for H1N1 and in terms of what the outlook is for that specific issue in terms of sustainability?

This is always very hard for us to estimate. We can try to look at above trends. We know health care had a couple million dollars in increased sales during the quarter that we think would be directly related to H1N1. We think there's probably an equal amount in other divisions from that. I would tell you, we are preparing for a possible fall event because we think it's a wise course of action, and we follow this quite closely. Don't know if it will transpire, if it will occur, but we want to be prepared to help our customers if it does come out in a much larger way.

Okay. Great. Thank you.

And the next question is from Gary Bisbee, Barclays. Your line is open.

Good afternoon. I guess can you give us any color on how Canada is doing well? It seems to me the economy is struggling in many ways like the US. Is it more just success of new customers or pushing more products than you've offered there in the past? What's driving that?

I think we had several things going in Canada. We very strong momentum going in. We have got more share upside in Canada than say in other markets. We have got a very good team and they are continuing to execute. So I don't know if it's a secret, but they have nailed a couple of large pieces of business moving into this and rolling them out helps.

Okay. Any update on the Apex campaign with Sysco?

Apex is a broad campaign. I'll separate the two. In the second quarter we had -- if you took the average placements last year, our placements in the second quarter was about 10% above. So we continued to have very strong success gaining new Apex accounts, which is important. And for perspective, that would be close to about a 1% share gain, not net, but that's the kind of gain given there's about 0.5 million restaurants in the US where this thing fits. So Apex is doing quite well.

Our work with Sysco, we say in the first half netted 10,000 new accounts. It's probably 30% plus above normal pace with Sysco, so it's significant. It's been gaining momentum. We have agreement we are going to both continue this program through the second half of the year because it's resulting in good net new gains for both of us.

And then just two cleanup questions, Mike, I didn't hear what you said the Asia-Pacific revenue growth on a constant currency basis was.

4%.

4%. And then can you tell us what the GCS loss in the quarter was?

They lost a couple million bucks.

Okay. Thanks a lot.

And the next question is from Rosemarie Morbelli from Ingalls and Snyder.

Good morning, guys. Looking at Europe, it continues to be an issue -- you have had several managers, you have taken many steps and actions since you acquired it from -- acquired the share from Henkel. Can you remind us what you are doing differently now versus the previous steps and when do you expect to see the benefit either on the top line or the bottom line or both, actually?

Well, Rosemarie, I mean, we have been -- look, we said we were going after top line by investing more in corporate account resources, which we have done. We had organic sales growth momentum improvement each of the last few years. Obviously this year is going to be an exception, but it is an exceptional year in a number of cases. We also said that we have to get after structural changes. We have taken advantage of a lot of low hanging fruit. But we have got a disjointed product supply system in Europe, so that we went out and undertook an SAT implementation so we would have transparency across the warehouse platform across Europe. It also allowed us to move to shared services and a number of other fairly standard processes that we just can't deploy today in Europe.

Where are we on the SAP? We have got over one-third of the volume on it. We will have over about 60% by fall. We will be at the 85% a year from now, so largely done. That continues to progress well, meaning we put on major countries without major hiccups, which is what you hope for and it's starting to give us transparency.

So my expectation on Europe -- the big news in Europe right now is a huge spike in raw materials moving through the P&L. It doesn't mean we think we are executing perfectly well, doesn't mean we are satisfied with every part of the business, but that's the big impact. I think as that settles out, you're going to see more normal margins in Europe play quickly and in the time to moving those from 9% to 13% to 14% and I still see -- we still see a path to do that, but we got to get throughout the SAP implementation so that we can take advantage of the inconsistencies there.

So we should really a big margin improvement in, let's say, 2011, giving you time by the middle of next year to be done with the SAP and figure out where you can make additional changes? Is that the game plan?

Yes, I think you'll see -- yes, I think in 2011 you will start seeing significant what I'll call OI margin increase. As you recall, we have already gained substantial what I'll call net income advantages as a result of how we structured and established a principal company in Europe. But you will start seeing in addition margin increases in 2011, 2012, and 2013.

Okay. Thanks. That is very helpful. And could you also bring us up to date on your SKUs rationalization -- where do you stand in the US and elsewhere in the world?

All the US divisions have completed their upfront work, which is really designing the product line that we need to go compete. It's around a -- it's a significant, over 50% reduction in SKUs in our North American business. We are going to start implementing in third quarter in some divisions, we are going to stage this. You don't want do it all at once. It would be a disruption in our products supply system. But we are already undertaking some of these eliminations and rationalizations as we move forward. It will take us a couple of years to fully implement. I don't think it will take us a couple of years to start seeing [benefits].

And then lastly, if I may, the margin in the US in cleaning and sanitation was extraordinarily high. Was there anything special and is that a number that's sustainable?

I think, I guess it gets to points that we have made. There was no -- I mean, no one timer or unique event in the business that you would point to that you would say is unsustainable. I think it gets to the point that we feel like we have had leverage in these businesses, and so often when we get asked can you bring the European margin to the US, our answer is we hope not because we believe there's margin expansion in all of our regions. I think as we have said as we have moved into this year, because of the nature of the year, we are going to focus more emphasis on margin expansion and getting after leverage opportunities because of the top line pressure and we are doing it in a way that we believe is sustainable.

Okay. Thanks a lot.

The next question is from John McNulty, Credit Suisse. Your line is open.

Thanks a lot. Just two questions. When you talk about the raw materials that are impacting Europe right now and that you expect to see pricing kind of similar to the way the US, we saw pretty robust pricing over the last 12 months, you expect to start getting pricing in Europe, is it going to be roughly the same magnitude? Is that what we should be thinking about in terms of kind of low to mid single digits?

You know what, John? What I would say is these things are always the way. Europe really got on this a little later than I would say North America, but they are on it in a material way in the second half, and you're starting to see fairly good pricing in Europe right now as we speak. It will play through the balance of the year and hold at a fairly good level. We will see declining raw materials in Europe, and that's pretty much a certainty because we know what the contracted price is as we move forward.

Okay. And then just in terms of margins, I believe you said the target for Europe was 8% by the end of the year. Did you give what you did this quarter?

It would have been 3% ish. I think it would have been 3% ish this quarter. And I got guys on a calculator seeing how wrong I am. Oh, it's 4%. Excuse me.

Okay. So there's definitely a pickup coming but it's -- and it does sound like the raws and the pricing are going to get you there. With regard to the -- with regard to the $7 million or so that you spent in terms of fixed investment in Europe, in terms of 2010, how should we think about that? I know you're going to be spending at least for a while in the first half of 2010, but when you look at 2010 versus 2009, how does the cost to fix Europe change?

Oh, I think as you move forward, we are going to continue to have investments, but they aren't going to be at the same rate in Europe in 2010 as they were in 2009.

We are completing the ERP roll-out, John, and so you'll start to see costs starting to come down because of that later this year and in 2010.

Okay. Great. Thanks a lot.

And the next question is from David Ridley-Lane, Bank of America.

Can you provide a little bit more detail on some of the growth initiatives -- it looks like you've pulled forward into 2009?

I would say if we pulled initiatives forward into 2009, there were more leverage initiatives, those that we shifted in [four scene] timing. But from a growth standpoint I would say there is several large initiatives. One is continue to build our core institutional F&B and Kay positions. There we are very much focusing on the largest corporate account players. We know these guys do best in these environments and tend to come out with outsized momentum. And so we want to increase our shares there and we are doing so successfully. We are also all over the health care opportunity that we have talked about, specifically around helping hospitals with infections acquired on premises. That work is going quite well. Our health care business is growing organically at high single digits. We are working to introduce new technology and plan to accelerate that as we go through. And we got a number of fundamental core R&D investments which we also believe will continue to fuel our growth in our core business as we go forward.

Okay. And I guess then on the leverage initiative that you pulled into 2009, absent those sort of discretionary initiatives, would you have had to lower the high end of your 2009 EPS guidance range?

Well, I -- this is like the age-old question. I guess if you want to ask me, you can do almost -- if somebody said you're going to die unless you do almost any number, we will find a way to do the number. I guess what we are trying to do is be very wise in what we call a very unique period. Recall we are going to be delivering pretty good -- I mean, EPS growth in a very depressed market situation while continuing to invest record amounts in our business. So if you're asking me, I guess if we rip down investments would we deliver more? Yes. Do I think that's the smart answer? No.

And David, once again for the second half we will be showing 13% to 19% EPS growth. So we are taking advantage of the improvement in raw materials and at the same time making the investments and delivering pretty good earnings growth.

Okay. That's very good. Thank you very much.

The next question is from PJ Juvekar, Citi. Your line is open.

Hi, Doug.

Hello.

You know, one of the key drivers of your institutional business is business travel and T&Es. I know T&Es were slashed this year by corporation. What's the outlook for next year? Do you see a big rebound next year in business travel?

You know what? That's -- the only real answer is I don't know, and we are in a position of -- we certainly aren't forecasting any big rebound in T&E travel for the balance of the year. Will it come back some day? I think it certainly comes back off these very low levels. Does it bounce back to where it was? I don't know.

All right.

But what I would say, PJ, is we plan, and we are taking things into our own hand. We know selling more new accounts, continuing to leverage new technology, ultimately getting back very aggressively on TTC, we believe we can continue to push the top line ourselves. I think we have proven we can do it in the past and we believe we are in a very good situation to continue do it as we move forward.

And if the economy recovers, PJ, that's just a nice tailwind behind us because we will be trying to drive our own growth and that will be another tailwind.

Mike, quickly, how many sales associates do you have now given this tough environment and your recent headcount reduction? Do you anticipate any change in that?

Right now we are at about 14,200. We think for the year we will probably be a little bit higher than that. But relative to last year, similar, maybe a little bit less. So probably similar to last year on a total basis for a year-end.

Okay. Thank you.

The next question is from Jeff Zekauskas, JPMorgan.

Hi. Good afternoon.

Hello, Jeff.

If you look over your business to the lodging industry overall and to the restaurant industry overall for the first half, in a constant currency basis, what were the growth rates of those two sectors?

Jeff, you mean globally or in Europe?

I mean globally for lodging and for restaurants.

We don't have numbers that really track it globally, Jeff.

Well, then I guess in the primary regions in which you do track it, what have the numbers been like and are they better than you saw it or worse than you saw it at the beginning of the year?

I guess what I would say, Jeff, is I think we anticipated a pretty difficult year fairly early. I would say that hotels probably have been impacted more significantly than we thought probably November, December. Restaurants in the range -- QSRs probably fared a little better than we might have hoped, and I would say full service restaurants particularly the top end has probably been hit harder than we expected. So there's a mix there. But I wouldn't say it was completely outside of what we laid out as possibilities moving into the year, right? Our QSR business is doing quite well as we go through this. Our restaurant business in total, given the demand decline, is doing quite well also.

Thanks for that. Secondly, in the $24 million of restructuring charges you took in the quarter, if you had to apportion that geographically, how would you do it? Where did you spend the money?

Let me give you the numbers for the whole $75 million. Really, the amount that flows through on a quarter is almost dictated by accounting rules versus strategically how we are laying out the opportunities. We are looking for our region split. Why don't you give me a minute and I'll come back to you with those numbers?

Well, then I guess if I can squeeze in one last question while you're looking for that.

Here, I've got it now.

Go ahead.

In Europe it's going to be -- of the $75 million, Europe is going to be around $27 million, APLA is going to be around $8 million, and the balance is going to be in the US which means $40 million.

So I guess lastly, in 2010, all things being equal, is that a year where you would expect positive pricing for the consolidated entity or negative pricing or flat pricing? Or do you not have visibility yet as to what 2010 might be like from a pricing standpoint?

I -- yes, we are in a position where we are going to be forecasting 2010. What I will say is we don't have a history of having pricing go negative and we don't anticipate that scenario going forward.

Okay. Great. Thank you very much.

The next question is from Dmitry Silversteyn, Longbow Research.

Good morning, gentlemen -- or I guess it's good afternoon by now. Most of my questions have been answered but I want to follow up on a couple of them. When you look at the performance of pest elimination and the comments that you made about the geography outside of the US, it looks like pest elimination was the positive contributing factor to performance in international markets, but it was a flattish business in the US. Is that due to different market dynamics or to different sizes of businesses and where you are in terms of gaining share and how differentiated you are in international markets versus US? Can you give us an idea of why the international parts of pest elimination did so much better than domestic?

Dmitry, I think you answered the question. It's -- the US business has a much larger share than say the businesses we have internationally, which are much newer. Also have, I guess, more striking advantages as we have gone over and the competitors haven't reacted. With that said, I think there's plenty of upside in our pest business going forward. Pest usually has a very difficult patch in early parts of recessions, because if we are doing our job, it means there are no bugs or rodents. And when people are trying to cut, they will eliminate and they will ask us to leave for a period of time. We are now being called back into accounts that we lost early in the cycle in a number of instances and it's a pattern that we have seen before. We don't love the pattern, but it's a pattern that we have to deal with and we expect pest ultimately rebound to the type of growth rates that we had saw in the past.

Okay. That's helpful, Doug. Second question, sticking with the other services, GCS, you have narrowed those losses significantly both sequentially and year over year despite lower revenues -- I think Mike talked about the [third] quarter being even better than the second. Is your expectation to get this business even in this environment to a breakeven point by the end of the year, or do you think that's too ambitious and you're still going to be losing money heading into 2010?

I think that would be too ambitious given the top line pressure. The only thing this business needs now is some top line wind to start getting to breakeven and better. I think all the work that we have done to bring down, if you will, lower the line at which you got to go across to make money -- and we have lowered it substantially -- has been very effective. Unfortunately it's all been masked by pretty significant challenges in the top line. So we don't expect the type of turnaround in the top line that you would need to get to breakeven by second half. So we will be losing money moving into next year, but obviously at a much slower rate than it was moving into this year.

So if I ask the question differently, if you get to the level of revenues that you had in 2008, this should be a positive operating margin business?

Put it this way. It would be a lot better from a profit standpoint. I would say the profit line on sales is achievable over four to six quarters if you get some real movement in the marketplace.

Okay. Okay. And then final question on health care, you talked about the initiatives in the US and obviously driven by hospital infections and the reimbursement for that from insurance and Medicare as well as some other drivers. Do you see similar drivers in Europe, or is your health care business in Europe relying on different end market and secular dynamics to achieve its growth?

There's really -- I would say there's not one single answer for Europe because the markets are fairly distinct by country. However, the HAICs or the health acquired infections is a huge issue and a huge topic in the UK. It's also been a topic in many other countries in Europe. It's an issue everywhere, candidly. It's just recognized and discussed in certain countries and not in others. So it's an opportunity. But in the UK, I would say it's probably even been a longer topic than it has been in the US. There are other drivers in Europe and there's new technology that we are bringing over from the US. Likewise we are taking some technology from Europe and bringing it over here. We like the health care and frankly have been very pleased with the progress we have made this year and the position that we are building for all years.

Can I follow-up with one last final question? What's the size of your health care business outside of the US?

Equal in size.

Okay. So what was it. About $250 million in the US or -- ?

It's like, I don't know, $230 million US and about equal in Europe.

Okay. Okay. Thank you.

The next question is from John Roberts, Buckingham Research.

Good afternoon, guys. Do you think GCS has the same effect that pest has? Initially people don't buy equipment, they run stuff longer, maybe not serviced as well but it's got to start breaking down, the same way the bugs come back and pests that is going to be a maintenance issue to come back and bite the customers on GCS?

Absolutely. I think there's -- you can postpone repairs so long and then you need to go repair them. Typically, though, just to put this in perspective, people have multiple fryers. So if they have three, if things are rocking, and one breaks down, you fix it immediately. If things are slow and one goes down, you wait for the second to go down, or if you're really pushing the envelope, you wait for the third to go down. So there's going to be some built-in pent-up demand, not significant, but we think you'll start getting the normalization, and you can only postpone this stuff so far.

But you're already starting to see the influx in pests, you said. You don't really see any sign in GCS yet?

I think what we have said is we believe the second half growth rates -- for sure the rate of decline will be improving in GCS in the second half versus of the first half. All right. But that's not an exactly an inflection point. I think we will call it when we see it in GCS.

Thank you.

And the final question comes from Bob Koort, Goldman Sachs.

Good afternoon. This is Amy Johnson sitting in for Bob. I have a few more quick follow-up questions. I think you mentioned raw materials costs spiked in Europe in the second quarter. You do expect the opportunities costs to drop in that region. Going forward, I'm wondering, in other [actual] markets like Asia, Latin America, have you seen very similar raw materials cost trend? That means the raw materials cost goes up in those regions and then you expect the costs to fall going forward?

What we have seen is actually the peak prices hit North America and frankly the other regions in Q4 of last year. They hit Europe, peak prices in Q1, and all have been coming down sequentially from there. It's just Europe's peak, if you will, and it's result in improvement is a quarter delayed from everybody else's.

So it's actually -- I just want to clarify in the second quarter raw materials trends on the year-over-year basis, except for North America, all other regions still higher?

They were higher than last year everywhere but in North America.

And then going forward, I mean, the third quarter of this year, shall we expect all the regions including everywhere the raw materials costs should be lower on the year-over-year basis?

Probably -- that's probably the best assumption you can have. There may be some exceptions, but we are talking single digits here and there. But by and large, raw materials will be favorable year on year in the third quarter and then even marginally more favorable in the fourth quarter.

My last question is really your FX guidance. Probably missed the part of your prepared remark if you mentioned something like this. Is that still $0.07 negative impact in the second half of this year?

No, no. We said it would be $0.03 in the third quarter and we didn't give a forecast for the fourth.

Got you, but based on the currency trends in the US dollar versus the Euro and the current level, why, next quarter you expect something pretty similar? I mean, the negative impact on the currency pretty similar to the second quarter. Wouldn't it be that a little bit more favorable? I mean the negative impact should be less than the $0.03.

Amy, I think I don't have my FX chart in front of me but the FX really moved in the fourth quarter is where the big move was. So it's really just looking at year on year comparison and looking at the currency mix that we have.

Thank you.

It appears there's no further questions, so that wraps up our second quarter conference call. As mentioned, this call will be posted on our website along with the associated slides. Thanks for your participation and our best wishes for a great day to all of you.

And this does conclude today's conference. You may now disconnect.